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Monday, February 21, 2011

A significant portion of the U.S. Treasury debt is represented by short duration paper, which makes the U.S. far more sensitive to rollover risk, and also makes the value of the debt less sensitive to inflation.

If you borrow funds for 30 years, you can turn around and create a massive inflation to diminish the real value of that debt.

If you've borrowed funds for a year and then create a massive inflation, you'll find that investors will require a higher interest rate on the debt next year, which prevents the obligation from being diminished over time.

Here is a monthly chart of the 10 year US bonds:

It looks like wave 2 marked in black colour has topped in bonds. The pattern takes the shape of a Head & Shoulder pattern with the Head, Left and Right shoulder marked in red.

The top in bond prices means yields and interest rates will rise which is illustrated in this daily chart of the 10 year bond yields following a mirror pattern of bonds.

A 5 wave rally marked in blue colour is completed which we assume is wave 1 up in interest rates also marked in blue.

The current rally could top in April 2011.

The next top in the 54 year interest rate cycle is expected in 2033 and we think the larger trend in bonds will be down until then.

The above is an extract of our just published ElliottWaveTechnician February 2011 Investment Newsletter.